Kevin Drum - October 2008

FRIDAY CATBLOGGING....We're in the middle of a mild Santa Ana condition right now, which means it's been pretty warm this week. Despite this, Domino has taken to burrowing under the bedroom quilt for her afternoon snooze. So that's what she's doing on the left. On the right, Inkblot, having finally cottoned to the fact that something is going on underneath the blankets, heads over to check it out. Needless to say, this had potential for considerable merriment, but after taking a brief swipe at Domino's paw, which was sticking out of the blanket, he got sort of addled and headed downstairs for a snack. That's always been the real center of his universe, after all.

LA TIMES ENDORSES OBAMA....I won't try to pretend that the LA Times endorsing a liberal candidate is some kind of harbinger of social upheaval, but still: they haven't endorsed a presidential candidate for over 30 years. This year they're endorsing Obama:

We may one day look back on this presidential campaign in wonder. We may marvel that Obama's critics called him an elitist, as if an Ivy League education were a source of embarrassment, and belittled his eloquence, as if a gift with words were suddenly a defect. In fact, Obama is educated and eloquent, sober and exciting, steady and mature. He represents the nation as it is, and as it aspires to be.

They still like McCain because they think he'll cut taxes more on rich people (seriously, that's what they say), but they also aver that "the presidential campaign has rendered McCain nearly unrecognizable." Perhaps. Or maybe stress reveals character more than they think. That aside, though, most of the editorial is sharply on point. You can read the rest here.

THE FIX WE'RE IN....Via Tim Fernholz, Rutgers history professor James Livingston offers his take on the core cause of our current financial meltdown. Naturally I like it, since it confirms many of my existing prejudices about the matter, so maybe you'll like it too:

The Great Depression was the consequence of a massive shift of income shares to profits, away from wages and thus consumption, at the very moment  the 1920s  that expanded production of consumer durables became the crucial condition of economic growth as such. This shift produced a tidal wave of surplus capital that, in the absence of any need for increased investment in productive capacity (net investment declined steadily through the 1920s even as industrial productivity and output increased spectacularly), flowed inevitably into speculative channels, particularly the stock market bubble of the late 20s.

....[Likewise], a shift of income shares away from wages and consumption, toward profits, has characterized the pattern of economic growth and development over the last twenty-five years....The offset to this massive shift of income shares came in the form of increasing transfer payments  government spending on social programs  since the 1960s; these payments were the fastest growing component of labor income (10 percent per annum) from 1959 to 1999. The moment of truth reached in 1929 was accordingly postponed. But then George Bush's tax cuts produced a new tidal wave of surplus capital with no place to go except into real estate, where the boom in lending against assets that kept appreciating allowed the "securitization" of mortgages  that is, the conversion of consumer debt into promising investment vehicles.

....And while consumers were going deeper into debt to service the current account deficit and finance economic growth, corporations were abstaining from investment: "The recent household deficit more than offset the persistent financial surplus in the business sector. For a period of six years  the longest since the second world war  US business invested less than its retained earnings." (FT 8/22/07, p. 13)

....So the Bush tax cuts merely fueled the housing bubble  they did not, and could not, lead to increased productive investment. And that is the consistent lesson to be drawn from fiscal policy that corroborates the larger shift to profits, away from wages and consumption.

I'll leave it to economists to argue over whether Livingston is right in detail. But the confluence of stagnant middle class wages; the resultingly vast pools of idle money looking for places to go; a rising federal deficit and a skyrocketing current account deficit; and then a series of tax cuts to make it all even worse  that's the big-picture core of what's wrong with our economy. It won't get fixed overnight, but the sooner we start the better.

POSTSCRIPT: And on a similar note, how about that capital gains tax cut in 1997, passed just in time to direct even vaster streams of cash into the dotcom bubble? Not such a good idea in retrospect, was it?

UPDATE: See Tyler Cowen here and Daniel Davies here for related thoughts. Though, really, I'm not sure "related" is quite the right word. But beneath the surface there's a sort of family resemblance.

BAILOUT WATCH....So how's that bank recapitalization going? Are big banks going to use their $125 billion in federal cash to expand lending and unfreeze the credit markets? The New York Times reports:

"There is no express statutory requirement that says you must make this amount of loans," said John C. Dugan, the comptroller of the currency. "But the economics work so that it is in their interest to do so."

Mr. Dugan added that he would not examine how the banks used the money, but he said their actions would "be open to the court of public opinion."

Ah, yes, the court of public opinion. The titans of Wall Street are famous for their humble submission to public opinion. That should work out very well indeed.

Or not. Especially if it doesn't matter because they still don't have any money:

Lenders have been pulling back on credit lines for businesses, mortgages, home equity loans and credit card offers, and analysts said that trend was unlikely to be reversed by the government's money.

"I don't think that the market wants to see that capital being put to work to leverage the business up again," Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month, told The Times. "My expectation is it's quarters off, not months off, before you see that capital being put to work."

....In the case of the nine-largest commercial banks  Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia  profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount.

In other words, their net profit for the past four years is already negative, and by the time this is all over their net profit for the entire past decade or three will be negative. So keep that government cash coming. $125 billion is only the beginning.

PURGING OHIO....A couple of weeks ago the Ohio Republican Party sued the Ohio Secretary of State. Their aim: forcing her to turn over to county officials the raw results of database matching operations for new voter registrations. She had refused because these matching efforts are notoriously unreliable, effectively purging tens of thousands of new registrations because of inaccuracies in the DMV and Social Security databases.

But of course the bulk of new registrations this year are Democratic voters, so the Ohio GOP went to court anyway. Today, in an impressively quick ruling, the Supreme Court unanimously ruled against them. I guess Scalia and Thomas must still be feeling guilty over 2000.

UPDATE: Elsewhere, Matt Yglesias makes the case for a national ID card as a way of cutting voter fraud. He doesn't actually say that, mind you, but that's how I choose to intepret his tale of voting woe anyway. And I agree.

DEFENDING THE SQUIGGLE....Daniel Davies defends the "squiggle," CNN's real-time plot of reactions from their focus group of undecided voters during presidential debates:

My only complaint about the crawler is that CNN removes it from the screen when the debate finishes. I absolutely wish that they continued to show the favourable/unfavourable reactions of the dial-testing focus group to the talking heads on the news afterwards; you'd be able to see the worm plunging every time Wolf Blitzer opened his gob. I suspect a few uncomfortable home truths would arise out of that one.

He's got a few other ideas for on-screen dial testing too. Oddly enough, though, I'm tired of the squiggle. For the first three debates I was fascinated by it even though I knew it was mostly just BS, but in the fourth debate I hardly watched it at all. It wasn't anything deliberate, I just didn't care. Short attention span, I guess.

READING THE MOOSE ENTRAILS....Apropos of nothing in particular, I want to go on the record with a prediction that Sarah Palin will disappear into a well-deserved obscurity after the election is over. She is not a "comer." She is not the future of the Republican Party. She will not run for president in 2012. In fact, she won't maintain any kind of serious national political standing at all. At best, she'll spend the next few years being a celebrity starter at NASCAR races and speaking at Republican prayer breakfasts. At worst, she'll be an occasional butt of late night comics.

Palin is lazy, ill-informed, contemptuous of policy, and way too convinced that everybody in the country is dazzled by her folksy energy and thousand-watt smile. Yes, the diehard GOP base is rapturously in love with Palin and her media mockin' ways, but that's more a reflection of the base's future, not hers. Palin is a three-day wonder who's already a month past her sell-by date, and on November 5th she'll disappear to Wasilla for good.

Every single change favors the Democrats, and there are 16 more that they'll cover in a separate story tomorrow. Details here. And Karen Tumulty reports that trends are similar in Senate races. Bottom line: If you're a Republican, life really sucks right now.

A new report based on previously classified documents suggests that the Nixon and Ford administrations created conditions that helped destabilize Iran in the late 1970s and contributed to the country's Islamic Revolution.

....The report, after two years of research by scholar Andrew Scott Cooper, zeros in on the role of White House policymakers  including Donald H. Rumsfeld, then a top aide to President Ford  hoping to roll back oil prices and curb the shah's ambitions, despite warnings by then-Secretary of State Henry Kissinger that such a move might precipitate the rise of a "radical regime" in Iran.

....Analysts and historians often contend that President Carter, a Democrat, fumbled Iran, allowing the country to eventually become one of the chief U.S. opponents in the region. But the report suggests that his Republican predecessors not only contributed to the shah's fall but also were inching toward a realignment with Saudi Arabia as the key U.S. ally in the Persian Gulf.

....We should get credit for what happened at [OPEC's Doha summit in December 1976]," Kissinger told Ford. "I have said all along the Saudis were the key. . . . Our great diplomacy is what did it."

But it would prove to be a Pyrrhic victory....The shah's government, shaken by the loss of oil revenue, imposed a harsh austerity budget that threw thousands out of work, collapsed investor confidence and panicked middle-class Iranians. Economic chaos and unemployment quickly spread.

Within a year of the Doha summit, the first mass demonstrations that grew into revolution broke out on the streets of the Iranian capital.

The collapse of oil prices in the mid-80s, also engineered by the Saudis, was one of the key factors in the disintegration of the Soviet Union. So apparently Saudi Arabia can claim at least partial credit for both the rise of the Iranian revolution and the fall of communism. Not bad for a country with a population of 20 million or so.